In March, the U.S. Securities and Exchange Commission (SEC) issued its final climate-related disclosures rule. The rule mandated that public companies disclose their climate risks and report on their greenhouse gas emissions. While implementation of the rule was temporarily paused in April amid various legal challenges, companies may still need to take action as other jurisdictions will require such disclosures.
Indeed, companies face an ever-growing and more complicated web of emissions-related reporting requirements, including two California laws that were passed last October and are also currently on hold, and a rule in the European Union that requires emissions reporting starting next year. All three rule sets require companies to report on their direct greenhouse gas emissions (Scope 1) and the emissions associated with their purchase and use of electricity, steam, heat and cooling (Scope 2). The California and EU rules also require Scope 3 reporting of “value chain” emissions produced by a company’s customers and supply-chain participants worldwide. The SEC included Scope 3 reporting in its original proposal but omitted this requirement in the final rule.
California’s law mandates Scope 1 and Scope 2 reporting in 2026 and Scope 3 reporting in 2027, while the SEC’s requirements technically begin at the start of 2026. The SEC’s requirements are significant, but largely just codify what many companies are already doing. The requirements for registrants include disclosing the risks that have had or likely could have a material impact on their business strategies, operations or financial condition, as well as any measures to mitigate climate-related risks and the costs of those measures.
Registrants must also disclose any oversight of climate-related risks by their board of directors, and management’s role in assessing and managing those risks. In addition, they must disclose the capitalized costs, expenditures, charges and losses stemming from severe weather and natural events such as wildfires, and losses related to significant carbon offsets and renewable energy credits.
Understanding the Stakes
With key regulations on hold, companies may be tempted to delay compliance efforts. That may just be delaying the inevitable, however, and not just because the currently stated deadlines may still apply. According to Niamh McCarthy, director of climate-related risks at Orbitas Climate Advisers, many other countries, including Brazil, India and Japan, and states such as New York, Illinois and Washington, are pursuing or have adopted climate-related financial regulations. “Market leaders can see this surge in climate-related financial disclosures as an indicator of what’s to come,” she said.
Companies without physical operations in California or the EU that do not see the urgency in preparing for Scope 3 reporting may also want to reconsider. For example, California’s law will require public and private companies with at least $1 billion in revenue to comply with its GHG emissions-reporting requirements. Those with $500 million or more in revenue will be required to report climate-related risks and measures to reduce those risks both to the state and on company websites.
These requirements will apply if the company is doing business in California, which the state has interpreted in line with its tax laws to mean “engaging in any transaction for the purpose of financial gain within California,” said Michael McDonough, partner at Pillsbury Law.
As a result, companies that have no physical presence in California may still be subject to the requirements. “If any part of their value chain happens there, the state could consider them covered,” McDonough said. “Any company with $500 million or more in revenue is likely to have some financial interest tied to California transactions, such as customers buying its product and bringing it home.”
Tracking Reporting Requirements
A company’s reporting requirements related to Scope 1 and Scope 2 emissions may not differ substantively between the SEC and California regulations as both require using the same international greenhouse gas accounting standards. The EU’s Corporate Sustainability Reporting Directive (CSRD) sets out reporting requirements similar to those in the United States and includes Scope 3 reporting. The first wave of large EU companies subject to CSRD have to make disclosures in 2025, while large non-EU companies will begin in 2026 and smaller non-EU companies with EU revenue over €150 million will need to comply starting in 2029.
Even if Scope 1 and Scope 2 emissions disclosures to the SEC and California end up being similar, companies must still track regulatory developments, including when regulations are finalized and come into effect, and if there are any variances among them. There likely will be some administrative differences between the disclosure regimes, McDonough said, and one key difference will be the SEC’s requirement to report “material” emissions, compared to California’s requirement to report all Scope 1, 2 and 3 greenhouse gas emissions, whether the company deems them material or not. “Companies will probably start with the California data and may scale it back for the SEC,” McDonough said.
U.S. companies with significant business in Europe may instead want to make their starting point the CSRD, since those regulations are final and include Scopes 1, 2 and 3 requirements. California’s reporting requirements are also similar to the EU rules.
Evaluating Scope 3 Risks
Although the SEC omitted Scope 3 emissions reporting from its final regulation, companies still need to understand and evaluate how Scope 3 greenhouse gas emissions may represent material risks or opportunities to the business. Kristen Sullivan, an audit and assurance partner who leads sustainability and ESG services at Deloitte & Touche, said the SEC has emphasized the more traditional “Supreme Court definition of materiality” that includes the total mix of information available to guide investor disclosures. California’s objective, on the other hand, is to promote transparency around climate-related risks.
As a result, companies providing Scope 3 emissions disclosures in compliance with California or EU rules will need to consider these broader disclosures when determining materiality for their SEC disclosures.
“The SEC is basically saying that if your company is making ESG disclosures elsewhere, this information should be considered when evaluating materiality—from a quantitative or qualitative perspective—for purposes of meeting investor expectations,” Sullivan said. “Scope 3 emissions are not required by the SEC, but organizations will need a much more comprehensive analysis to determine what should or should not be included in an SEC filing.”
For Scope 3 emissions, large companies will have to rely on the emissions calculations of often smaller and less resourced value-chain customers and suppliers. Therefore, CSRD regulations provide a three-year grace period in which financial statement preparers can omit Scope 3 emissions reporting and instead disclose why they omitted it and their efforts to obtain it.
McDonough said that the California emissions law requires companies to follow the reporting standards established by the GHG Protocol, including its guidance for using primary and secondary data sources such as industry-average and proxy data, and it may also allow additional information to inform Scope 3 estimates in the final regulations. He added that California’s law essentially presumes that all greenhouse gas emissions are “material” and worthy of public disclosure, but the SEC regulations leave the determination of materiality to the company, and defining what is material in every situation may be challenging.
The more stringent standard will require companies to provide more detailed disclosures, increasing the risk of the SEC comparing the federal disclosures to those made to California and asking why a company did not include that information in its SEC financial statements. “California’s requirements will probably end up dragging a lot of public companies to a higher standard of disclosures to the SEC, even if the SEC standards arguably do not require that level of detail,” McDonough said.